Legal Meaning of Company in India and its Evolution 

This article titled ‘Legal meaning of Company in India and its Evolution’ is written by Sweta Verma and discusses the meaning of a company in India and its evolution.

Legal Meaning of Company in India and its Evolution

The word company is derived from the Latin term “com” which means together or with, and “panis” which means bread. So, the meaning that comes out is the association of people who ate their meal together. In ancient times, people used to discuss their business matters while having a meal.

The general definition of company is “incorporated association of person”, where a person can be a natural person or artificial person. The company consists of both a natural person and an artificial person.

In past, there were two methods to carry business. First was monopoly and second was partnership both these were not suitable to carry out large-scale business. In the 18^th century, with the industrial revolution, there was a huge impact on large-scale business. The businesses started to expand with increasing needs and this type of business was difficult to handle with both these methods. As in monopoly, the loss of business is taken up by one person and partnership consists of a limited number of persons. These two were suitable for small scale thus to conduct large-scale business, the company came into existence.

I. The definition of the company by different authors

1. Prof. L. H. Haney, “company is an artificial person created by law having separate entity with a perpetual succession and common seal.”
2. Lord Lindley, ” by the company is meant an association of many persons who contribute money or money’s worth to common stock and employ it for some common purpose. The common stock so contributed is denoted in money and it’s the capital of the company. The person who contributed it or to whom it belongs are members. The proportion of capital to which each partner is entitled is his share.”
3. Kimball and Kimball, “ A corporation is by nature an artificial person created or authorized by the legal stature for some specific purpose.”
4. Justice James, “A company is an association of persons united for a common object.”

II. The legal meaning of company

According to SEC 2 (20) of Companies Act, 2013, a company is the association of person formed or registered under companies act or the previous companies acts and this act also tells about the formation of a company[1]. This act is the creator and destroyer of the company.

A company is an artificial legal person which is created by law and can be dissolved only by law.

It is invisible, intangible, and exists only in the eyes of law. A company can also enter into a contract by its name. A company can acquire and dispose of the property and can it fined for the violation of law, in simple terms, a company can sue and be sued. In business, companies act as a human entity but a company is given more privileges to conduct business than an individual human. A company is not only a legal institution but also a piece of legal advice for the attainment of social and economic needs.

III. Nature and characteristics of a company

Since a company is not an actual human being, but an artificial person which has its separate entity created by law. So, being an association of persons with like minds form by law and registration under the companies act, it has certain limited characteristics.

1. Independent corporate existence

SEC (9)[2], the company has a separate entity then its members. A company has its name and seal along with this companies can also have its assets, its bank account can enter into a contract. The company has its own identity than the person who runs it.

There is a leading landmark judgment Salomon v. Salomon & co. Ltd.[3] in this case, the company of leather boots was run by Salomon and he solely carried out business for several years. He formed this company consisting of himself, his wife, a daughter, and four sons. Every member own one share whereas he owned 20,000 shares and £10,000 debenture (approx. Values) after one year company went into liquidation.

Now the unsecured creditors demanded their share of money before Salomon, as they said the company was formed by and consists of the Salomon family so the company and family both are identical. They said there is no separate legal entity and the company was acting as an agent.

The Court held that the company is an independent legal person and Salomon being a debenture holder must be given priority over to unsecured creditors, so Salomon must be paid first and the company is not an agent or trustee. This judgment was brought in India many years ago before the Salomon case under Re kondoli Tea Co. Ltd[4], where Calcutta High Court recognized the concept of a separate legal entity.

2. Limited liability

The liability of members of the company is limited to the extent of their share capitals contribution to the company. The limited liability attracts many people to invest their money in the company and in case of loss, the creditors cannot claim over the personal property of the members. In Re London & Globe Finance Co. Ltd[5] the court appreciated this feature of limited liability it said small sums add into a large capital. Its is to the advantage of investor as well as of public and at the end, it increases the wealth of the nation.

3. Perpetual succession

The company has continuous existence independent from its members. The company is created by law and come to end only by law. The death, insanity, insolvency, or incapacity of a member does not affect the existence of the company.

Professor L. C. B. Gower said, “members may come and may go but, companies live forever”.

4. Separate property

A company has a separate legal entity and name. It can enter into a contract by its name. It can own, manage and dispose of its property. In Bacha F Guzdar v. CIT[6] Supreme Court held the shareholders do not become part-owner of the company or its property, they only have certain rights given by law. The court denies identifying shareholders with the company and told the company has its own identity.

5. Transferable shares

The shares or other interests of members of the company are movable property[7]. The capital of the company is divided into shares. The shares of the company are freely transferable by its members. A shareholder is free to withdraw his membership from the company by selling his shares.

6. Capacity to sue and be sued

A company is a corporate body that can sue someone and can be sued using its name. Sue means to file legal proceedings or bring a legal suit in the court of law. If the company arises from a situation of loss caused to it, the right to use of a company activates. A company is separate from its member can even sue its members.

7. Professional management

A company as a form of business has huge funds. It can easily afford to hire professional experts to perform managerial and other activities of the organization. The expert and specialized people improve the efficiency and working of the company.

8. Finances

The shares of the company being transferable can thus the biggest advantage of a company is that it can collect a large amount of capital by issuing its share to the general public. Apart from share capital, the company can collect funds by raising loans from financial institutions and by issuing debentures and other securities.

9. Common seal

Being an artificial person, a company has its legal entity and a company does not have its signature but has a common seal that acts as the company’s signature. This seal is used by the authorized agent of a company and this seal is kept under their custody.

10. Limitation of power

A company cannot go beyond the stated in its memorandum of Association[8]. Memorandum of association fixes the object of the company. The action and the object of the company are restricted in it and the company wants to go beyond its fixed power memorandum must be altered first.

IV. Evolution of Company

The history of the development of companies in India is somehow linked with that of England. So, the companies Act is formed or framed keeping in mind the basic structure of the companies act passed in England. The first companies act in India came in the year 1850[9].

It guided the registration of the companies, transferability of shares, and unlimited liability. The unlimited liability was the biggest flaw in the Act so the new act was brought, Joint Stock Companies Act, 1857. But under this act banking and insurance companies were mentioned under unlimited liability.

To remove banking and insurance companies from unlimited liability, Joint Stock Companies Act, 1860 came into existence. Under this act banking and insurance companies can be included in both limited and unlimited liability.

In the year 1866, Joint Stock Companies Act with new provisions came into force. It cancelled all the previous provisions or legislation and defined new law governing- Incorporation of companies, regulation for companies, and winding up of a company.

Now, this act also got amended from time to time as per the needs. And finally, in the year 1913, the Companies Act came into existence. For the first time under this act law ruling the functioning of Companies, Commercial organizations, and Institutions of private companies was introduced.

Indian Companies Act, 1936, this act introduced various provisions relating to Directors, Managing agents, Investigation of fraudulent activities and Granting of security and payment of provident fund to its employees, was introduced.

A committee of 12 members was formed on 25^th December 1950 under C. H. Bhabha and Indian Companies Act 1956 was introduced.

The main objective of this act was to meet the social and economic needs of our country by generating employment opportunities. The basic feature of this act is-

1. The full and fair disclosure of various matters in the prospectus.
2. Finance affairs of the company, disclose its accounts.
3. Intervention and investigation by the government.
4. Restriction on the power of managerial personnel.
5. Protection of minority shareholders.

A committee of on 2^nd December 2004 under the chairmanship of J. J. Irani was formed and brought Companies Act 2013, which is the currently regulating companies act India. This act consists of 470 sections, 29 chapters, and 7 schedules. This act is more flexible and dynamic. The bill was passed by the lower house, Lok Sabha on 18 December 2012 and from Rajya Sabha on 8 August 2013. The act got Presidential assent on 29^th August 2013 and became a law.

V. Conclusion

In India to conduct any sort of business whether large or small people usually tend to open a corporate body, mostly a company. There are many advantages for a company to run a business than for a human to conduct solely. There had been series of amendments and an ordinance in the history of the company’s development and the Companies act, 2013 is a consolidated act with all the necessary rules and regulations, and all the companies that exist in India are governed by the companies act, 2013. The companies which were registered under previous acts are also regulated by the act of 2013.

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References

[1] Section 3, Companies Act, 2013

[2] Companies Act, 2013

[3] 1897 AC 22 (HL)

[4] ILR (1886) 13 cal 231.

[5] (1903) 1 Ch 728, 731

[6] AIR 1955 SC 74: (1955) 25 Comp Cas 1.

[7] Sec 56, Companies Act, 2013

[8] Sec 4, Companies Act, 2013

[9] Joint Stock Companies Act, 1850

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